The objective of monetary policy is low and stable inflation. The inflation target is set at 2½ per cent. The key interest rate is set on the basis of an overall assessment of the inflation outlook, normally two years ahead.

The analyses in Norges Bank's Inflation Report, together with the Bank's current assessment of the outlook for price and cost inflation and developments in the money market and foreign exchange market, provide a basis for decisions concerning the key interest rate.

In its assessment today, the Executive Board placed particular emphasis on the following factors:

In the Inflation Report published on 5 March, consumer price inflation two years head was projected at 2¼ per cent with an interest rate of 5½ per cent and a krone exchange rate equal to the average for February. Price inflation is expected to be subdued in the next few months due to the strong krone and low price inflation internationally.

Price inflation in the first quarter was on average approximately as projected in the Inflation Report, while the March figure was somewhat lower than expected. In March, the year-on-year rise in consumer prices, as measured by the CPI-ATE, was 1.5 per cent. The strong krone last year and low inflation abroad contribute to a reduction in prices for imported consumer goods. The effective krone exchange rate has weakened this year and is now 2-3 per cent lower than assumed in the baseline scenario in the last Inflation Report.

The rise in prices for domestically produced goods and services is marked by high wage growth in Norway. Wage growth in 2003 will be lower than in 2002. The results so far in this year's wage settlement indicate that wage growth in 2003 may also be somewhat lower than the projection in the Inflation Report, which was 5 per cent.

Economic developments in the global economy are weak. Low interest rates and tax cuts are measures being used in a number of countries to sustain activity. It is uncertain when economic growth will become self-driven. In the US, there is a risk that growth in consumption will slow before investment picks up. Growth in Continental Europe has been sluggish, particularly as a result of developments in Germany. Since our last monetary policy meeting, the key rate has been reduced in the euro area, Sweden, Denmark and New Zealand, whereas it has been increased in Canada. In a number of countries, there are expectations of even lower interest rates.

After the fall of the former regime in Iraq, equity prices have risen somewhat. The oil price has dropped to USD 23 per barrel.

Growth in the Norwegian economy is probably also low. Developments in parts of the business sector are marked by high cost levels, low profitability and global stagnation. Investment may be lower than projected in the Inflation Report. High wage growth has weakened central and local government finances and will probably lead to stagnation in public sector employment. Unemployment is increasing. According to Statistics Norway's Labour Force Survey figures, unemployment has reached 4.1 per cent, which is on a par with the average for the 1990s. Growth in private consumption, which has been high, appears to be dampened somewhat by the high electricity bills that are now falling due for payment.

Information from our regional network confirms a relatively sluggish trend. Demand and output in export-oriented manufacturing are falling, but the outlook is not perceived to be as negative as in the last contact round. The construction industry in southern Norway reports a low volume of new orders. Companies supplying services to the business sector are experiencing a period of strong contraction, and the production of services for households is stagnating. The consumer goods industry and retail trade continue to grow according to our network contacts.

Credit growth is slowing. This is reflected particularly in lower credit demand from enterprises. House prices are levelling off. Normally, this would gradually lead to a decline in household credit demand, but growth in household debt is still very high.

On balance, developments during the last few weeks point to low inflation in the period ahead. According to Norges Bank's overall assessment, with an interest rate of 5.0 per cent, the probability that inflation two years ahead will be lower than 2½ per cent is greater than the probability that it will be higher.

Charts used in connection with the Executive Board's monetary policy meeting:

International economy (177 kB)

Financial markets (284 kB)

Demand and output (75 kB)

The labour market (76 kB)

Prices (70 kB)